Snapping up success

Can you buy your way to success? When it comes to technology, some of the greatest minds in enterprise think so. Take the purchase of ARM Holdings, one of the UK’s leading tech firms, by Japan’s SoftBank last year. With a price of US$32.4bn, the deal contributed to a record quarter for technology acquisitions, reckoned to be worth $156bn, according to professional services firm EY. Much of the activity was by non-technology firms buying start-ups and smaller businesses to tap into a rich seam of innovation.

Buying a business can be the quickest way to gain access to a new product, market share, or even a highly-skilled team. Some enterprises, especially in fields like engineering and technology, have a track record in R&D. Others are finding that innovation comes increasingly from outside their firm, and even their industry. Start-ups and other agile businesses are disrupting markets by being swift to innovate. Rather than play catch up, established firms are using their cash to jump start their own innovation programmes. 

Google, for example, has a track record in backing emerging technologies, so perhaps its purchase of Deepmind, an AI company, is not a surprise. But why did Facebook buy Oculus, the virtual reality (VR) tech manufacturer? No doubt Facebook sees the potential of VR for future products, but the technology is too far removed from its existing business to develop in-house. Acquiring Oculus was the obvious next step.

"Technologies such as AI, robotics or VR are relatively new, and they're changing whole industries, jobs, markets and productivity," says Prof Mark Skilton, of Warwick Business School. "They change companies' behaviour as customers change their buy patterns. They challenge business models through the sheer brute force of new ideas."

The challenge for business leaders, then, is to identify the sectors where buying innovation makes sense.

"The classic question is whether to build, partner, rent, or buy," says Ray Wang, of advisory analyst firm Constellation Research. "Acquisition is the fastest time to market, but you have to look at acquisitions from multiple dimensions.  Are you buying talent, product, market share, or a business model?”

Established firms may favour acquisitions, either because buying a company brings in a ready-made product, a core technology, or even a talented team that would be hard to assemble from scratch. With a product, the new owner can put resources behind an invention, and achieve the type of scale that eludes most startups. With technology, the new owner can use intellectual property to improve its product range, and fight off disruptive rivals. Or it can use products and technology to disrupt its own, or adjacent, markets.

"Acquiring another company is often one of the best ways to disrupt, especially when it comes to buying companies for their technology," says Nigel Allen, marketing director at KYOCERA Document Solutions. The company recently bought Annodata, a managed printing and IT services business.

"Firms often look to acquire another company when they offer something they don’t have themselves," he adds. "They may have spent lots of time and resource on developing a new patented product, for example, or they may have experience in something you don’t. In our case, it was the latter."

Successful acquisitions, though, need skill as well as careful research and preparation, especially when established enterprises are looking to disrupt a market, rather than simply grow their market share. 

"Traditional businesses, particularly the ones in markets which are being heavily disrupted by technology and the internet are unlikely to generate the drive necessary to adapt to the new reality," points out Victor Sunyer, corporate finance partner at investment firm Delta Partners. 

"An acquisition is a potential alternative to overcome this challenge. It enables the company to acquire not only the technology or 'know-how', but more importantly it enables the necessary people with the right mind-set to 'infect' the old organisation with the disruptive 'virus'." 

Buying a future competitor to head off a potential threat is a common tactic, points out Prof Skilton. Other deals are more focused on co-investment and leveraging the larger business's financial and marketing clout. But an acquisition that sets out to disrupt a market demands a deeper understanding of the target company's technology, intellectual property, leadership team and potential. Ideagen, a company specialising in quality and safety management, and compliance software, recently spent £5.5m buying IPI Solutions, an aviation industry specialist. 

“In terms of disrupting the wider GRC [governance, risk and compliance] industry, our strategy is very much based around strategic acquisitions. We are doing two things to corner sections of the very large GRC software market – acquiring best of breed software applications, people and organisations and federating them into the wider Ideagen Group," says CEO David Hornsby. “This helps to disrupt our competitors and allows us to get to market quickly and successfully.”

Successful acquisitions, though, need care. An enterprise will only disrupt if the new acquisition continues to thrive, and retains the ability to develop its unique ideas. This means paying as much attention to the human side of the process as it does to the financials. 

"The acquiring company needs to look into both the capabilities they are acquiring and how the integration plan will deliver these in the best possible way," says Victor Sunyer, of Delta Partners. 

"Acquisitions aren’t easy," agrees analyst Ray Wang. "You must focus on culture, ensure go to market alignment and make sure the product teams and technologies can work together.  However, M&A is a core competency if you intend to disrupt."